What CAGR tells you (and what it hides)
CAGR — compound annual growth rate — answers one question: "At what steady yearly rate would this investment have had to grow to get from its start value to its end value?" It is the standard way investors, companies and funds compare growth across different time spans, because it converts any total return into an equivalent yearly rate. What it hides is the ride: two investments can share a CAGR while one cruised and the other swung wildly. CAGR measures destination and time, not risk.
The CAGR formula
Take the growth multiple (end ÷ start), raise it to the power of 1 ÷ years to spread it evenly across the years, and subtract 1. That is all CAGR is — a geometric average of growth, which is why it is always lower than the simple average of yearly returns when returns vary.
CAGR vs average return
An investment that rises 50% one year and falls 50% the next has an average return of 0% — but it actually lost 25% of its value, and its CAGR is about −13.4%. The geometric math of CAGR reflects what your balance actually did; arithmetic averages of returns do not. Whenever someone quotes an "average annual return," check whether it is a CAGR or a simple average — the simple average flatters.
Where CAGR is used
- Funds and portfolios: 3-, 5- and 10-year CAGR figures are the standard scoreboard.
- Business: revenue, user and profit CAGRs compare growth across companies of different sizes.
- Your own goals: the CAGR your savings must achieve to hit a target — compare it with realistic market returns in the Investment Calculator.
Worked example
$10,000 grows to $25,000 in 10 years. Total growth is 150%, but the CAGR is (2.5)1/10 − 1 = 9.60% per year — not 15% (which is what dividing 150% by 10 would wrongly suggest). At 9.60%, money doubles roughly every 7.5 years, which the Rule of 72 confirms: 72 ÷ 9.6 ≈ 7.5.
How to use this calculator
- Enter the starting value of the investment (or revenue, or any quantity).
- Enter the ending value.
- Enter the number of years between them (fractions allowed for partial years).
- Read the CAGR and compare it against alternatives measured over different periods.
- Check the implied path table to see the smooth trajectory CAGR describes.
Working backward from a target
Rearrange the formula to plan: required end value = start × (1 + CAGR)years. If your portfolio must grow from $50,000 to $120,000 in 12 years, the required CAGR is (2.4)1/12 − 1 ≈ 7.6% — ambitious but within historical stock-market range. Demanding a 20% CAGR from a savings account, by contrast, is how you know a plan needs more contributions, not more hope.